Home Depot and Lowe's showed that consumers are still opening their wallets to fix up their homes. Plus, Wynn looks undervalued, Intel opens up, and the Fed remains divided.
Jeremy Glaser: A home improvement divergence; Intel opens up; and an undervalued casino. This time on the Morningstar Weekly Wrap.
The home improvement warehouses have been riding the wave of the housing recovery, but Lowe's recent results were somewhat tepid in comparison to Home Depot.
Jaime Katz: With second-quarter results out, Home Depot and Lowe's indicate to us that the bifurcation in consumer spending will continue to persist. Both companies reported top-line growth of a midsingle-digit pace with low double-digit earnings growth. The quarters were slightly different though with Home Depot reporting a business-as-usual quarter, generating results that were in line with expectations and raising their earnings per share guidance on operating efficiencies. Lowe's who was able to raise their top-line guidance, thanks to the inclusion of RONA, actually lowered their earnings per share guidance as the lower margin profile of RONA was folded into the mix. Over the next three quarters, we expect RONA's lower operating margin profile to weigh on operating performance of Lowe's at the enterprise level, but we think operating margin over time will improve at Lowe's, closing the operating margin gap between Lowe's and Home Depot. We went ahead and raised our fair value estimate on Lowe's to $85 from $83, and have maintained our fair value estimate of $125 per share on Home Depot.
Glaser: Intel struck a licensing deal with ARM this week to allow it to compete with the major makers of chips for mobile devices. This is important news, but unlikely to be a game-changer for the chipmaker.
Abhinav Davuluri: Intel hosted its annual developer forum this week in San Francisco and announced a bevy of new products including a wireless, virtual reality headset co-developed with Microsoft. The biggest news item in our view was the collaboration with ARM. Specifically, Intel will be manufacturing ARM-based chips used in smartphones by a foundry relationship. This will allow Intel to compete with the likes of TSMC and Samsung Foundries for the business of Apple and Qualcomm down the line. Now while this wasn't the exact exposure that Intel had been hoping for in prior years with respect to the smartphone space, it will allow Intel to leverage its manufacturing expertise and facilities in the smartphone ecosystem. All-in, this doesn't move the needle for us just yet, and we've maintained our $31 fair value estimate, and we continue to see shares as modestly overvalued.
Glaser: There aren't many cheap stocks out there these days, but Wynn still looks undervalued even if it is new Macau property will have fewer tables than initially expected.
Dan Wasiolek: Recently, Wynn received 150 table allocation for its new Palace Casino opening Aug. 22 in the popular Cotai region of Macau. The allocation was a little bit below our and Street expectations, but we think the impact to the fair value is minimal. That's because Wynn also has an existing casino in the Peninsula of Macau where there are unused and underutilized tables that will be shifted over to the Palace Casino. As a result, our fair value did decrease, but only slightly to $122 from $125 recently. Additionally, we think that Wynn remains well-positioned for Macau growth. The Wynn Palace Casino is going to increase its room share in the region to 9% from 6%, and the company noted that the first few weeks opening has occupancy levels in the 70%-80% range. Finally, we remain constructive on Macau's intermediate-term growth as we see midsingle-digit annual revenue growth in the region over the next 10 years and Wynn growing above a level of that of high single-digit rate over the next 10 years.
Glaser: The Fed minutes released this week show that the central bank is still divided on when to raise rates. It could happen as soon as September, but will be very much dependent on what the economic data looks like in the weeks ahead.
And no matter what the Fed does in the short term there are plenty of people thinking about their long-term retirement plans. On that front, our Karen Wallace took a look this week at how younger investors should think about Social Security.
